The coronavirus has dealt the world a one-two punch of a deadly health crisis combined with a devastating economic blow. Panic is setting in as hospital systems around the world are placed under tremendous strain whilst economies grind to a halt as shutdowns set in.
No business is immune, and despite swift and large stimulus being planned by the government, whether a startup survives largely hinges on its own actions in responding to this temporary crisis. With the scientific and medical community doing their best containing the virus, below is a list of financial strategies a startup can implement to safeguard its business and survive.
Note however that not all of these strategies will be suitable for every startup. The following advice is general in nature.
For pre-revenue and loss-making startups and scaleups, the most important source of capital – equity investment – is slowing down. Angel investors and VCs are themselves dealing with an unprecedented crisis. This fear of the unknown means that some of these investors (but not all, especially not the larger VCs) are choosing to sit on their cash reserves to deal with unpredictable flow-on impacts. We are seeing many smaller raises being deferred or moving forward very slowly as people become more risk-adverse.
Currently, we see a startup’s existing investors as the best starting point because they have already put in significant amounts of equity and would not want to watch their investment wither away. We are advising founders to be realistic with valuations and focus on the bigger picture for now – survive first, then thrive.
Offer your customers a yearly subscription for a discount instead of monthly subscription.
For non-subscription customers, work proactively with them to understand their ability to pay and the likely timing of cash collections. If they are struggling, agree a plan with them. Consider using fee funders to finance new or outstanding invoices for customers, allowing you to get paid up front while your customer can spread the payment over a longer period.
Finally, although conventional startup wisdom says “Market share is everything”, in the current circumstances it may be worth dialling back the amount of marketing spend for the next few months or focus on areas of marketing where you know with a degree of confidence that you will receive an immediate return on investment.
This is a time for startup founders to show true leadership. Clearly communicate your plans with your employees and provide regular updates as things evolve. Employees are looking to you to take a leadership role in a time of uncertainty. Be clear about your position on sick leave entitlements, working from home and the need if required for leave without pay.
To compensate staff for any loss in wages, now is the perfect time to set up an employee share scheme if you have not already done so.
For startups with enough cash reserves, the economic crisis presents an interesting opportunity to recruit some key hires who are often so hard to find.
A cautionary note about superannuation – whilst the Australian Tax Office (ATO) may be lenient with extensions on tax instalments (see below), employee superannuation does not fall into this category. There are harsh penalties that can be applied to employers and their directors where superannuation is not paid. This is not a commitment you should defer.
Keep a tight rein on expenses – distinguish between discretionary Vs necessary spending and ruthlessly cut the former.
Consider seeking a reduction for a short period of time from the landlord. Reduce contractors where possible and seek extensions to pay creditors.
Government stimulus and grants
The Federal Government has released a $17.6b stimulus package. There are various measures such as expanded instant tax writeoffs and support for apprentices, but for startups the largest expense is usually wages so the most relevant item is the cash payment of up to 50% of PAYG withholding on employee wages for March to June 2020 to a maximum of $25,000 – so get those Business Activity Statements lodged as soon as possible.
The State Government has also announced a number of initiatives to support small business. In NSW, the most significant of which is a deferral of payroll tax for businesses with payrolls of up to $10m. Payroll tax will be waived for three months to 30 June 2020 whilst the payroll tax threshold is expected to be raised to $1m for the 2021 financial year.
R&D tax incentive
Expedite your 2020 financial year R&D tax incentive claim by starting work now instead of after 30 June. Ensure this is properly coordinated with the year-end tax return preparation process since that is the last step of the R&D tax incentive claim process.
There are numerous R&D tax incentive lenders in the market providing finance based on year-to-date R&D expenditure. Work with an R&D advisor and your lawyer to assess if these lenders are right for you.
ATO assistance and support
Request an extension of time to lodge and pay tax obligations. We have already seen the ATO offer extended payment terms to businesses impacted by COVID-19. The ATO has also indicated it will consider remitting interest and penalties incurred after 23 January 2020 for any businesses affected by COVID-19.
Businesses on a quarterly GST cycle may elect to change their GST reporting period to monthly if that assists with obtaining quicker GST refunds.
Cash flow forecasting
Update your cash flow and consider what level of detail is required and how often to track (daily vs weekly). Consider also stress-testing the cashflow with different scenarios, for example what contingency plan is there if a key customer drops out? Recast your budget with assumptions that reflect current and expected trading conditions. Put in place various scenarios to test the outcomes. What are the implications if revenues drop by 20%, 30% or 40%?
As the crisis unfolds, some business will undoubtedly fall into trouble. If you are unsure how your business is faring, ask the question – can the business pay its creditors, employees and tax obligations as they become due? Unfortunately, some startups may need to seek advice on director liabilities and insolvent trading laws.
There is a silver lining!
In the current environment, it is easy to forget that with every massive disruption comes opportunities. We are advising startups to focus on preservation of their business and capital so that when the storm is over, they are in a position to capitalise on the opportunities that will inevitably present themselves.